Research

This paper is about the price effects caused by a VAT (value-added tax) reduction

for menstrual hygiene products in Germany. Several aspects make this VAT

reduction particularly interesting: The exogeneity of the reduction under otherwise

constant economic conditions, the reduction was substantial and permanent,

demand for the products is inelastic and in many cases, pass-through rates are

more than 100 percent. We find that the VAT reduction is completely passed

through to consumers. Despite this complete pass-through, we still detect a

significant effect of retailer competition: When more retailers offer a product, the

price reduction is larger.

In markets with experience goods, entry regulation in the form of occupational licensing is widespread.

To answer the question whether consumers benefit from such regulation as intended,

we run a market experiment with buyers who are heterogeneous with respect to their taste for quality.

Two sellers first sequentially choose whether to invest, where investments either improve a seller's ability

to provide better quality or make quality observable. Then, sellers choose qualities and finally set prices.

We compare treatments in which the two firms can always offer a product to treatments in which

an investment is a prerequisite to enter the market. Our results show that the effect of the regulatory

entry barrier depends on the effect of the investment. Firms invest significantly more when the investment

in qualification is required by regulation. However, we observe significantly higher qualities only when

the investment in qualification leads to the observability of the quality.

This is in line with theoretical predictions. In that case, consumer surplus also rises.